2018 FinQuiz CFA Level 2 Formula Sheet

•  

  Reading 10: Multiple Regression & Issues in Regression Analysis

  ℎ  s

  (df numerator = k = 1) (df denominator = n – k – 1 = n – 2)

  11. Prediction Intervals = Y ± t

  3

  s

  m

  = s

  m >

  ( fgg h )  

  >

  1 +

  1

  and

  2 f f s s =

  ( ggi jkhk/ )

  =  

  1.   Y i = b + b

  bcd bce

  10. F-Statistic or F-Test =

• ./ 0+1
•  
•  
• ()+))? 0+1 96 ?
• ε
• b
• … + b
• ε
•  
• 1
>> >Z

  Total n-1 SST= RSS + SSE

  (Unexplained)

n-2 SSE

MSE = SSE/n-2

  

1 RSS

MSR = RSS/1 Error

  (Explained)

  DoF Sum of Squares Mean Sum of Squares Regression

  > Source of Variability

  [ Z\1 −

  − − 1 Total df = n-1 = Z

  − >

  Z [ Z\1

  − − 1 Error df = n-k-1 =

  − >

  1 X 1i

  ANOVA SS MSS F Regression df = k =

  = 1 −

  s b b t −

  For Large Sample size DW Statistic ^{1 b 1 1}

  }~+}~k/ ?

  5.   Durbin-Waston Test = =

  2 residuals

  Test statistic = n × R

  = Conditional Heteroskedasticity exists

  A

  H

  H = No conditional Heteroskedasticity exists

  4.   Breusch–Pagan test

  >

  1 −

  [+1 [+w+1

  >

  2 X 2i

  =

  2

  ,   3.   Adjusted R

  y

  w wZ

  1Z

  u

  =

  Z

  2.   Prediction equation =

  ,i = 1, 2, … n  

  i

  X ki

  k

  Z [ Z\1

  9. ANOVA (Analysis of variance) =

  O+O P+P O+O ?

  i

  or =

  345(O,P) 5;<(O)

  =

  1

  Slope or regression coefficient =  b

  =

  1 − =

  x b y b

  Intercept (b ) =

  ,

  i

  1 X i

  = b + b

  4. Linear Regression = Y

  s b t ±

   t  distribution  with   n − 2 deg. of  freedom

  < 0+> 1+<?

  3.   t-test (for normally distributed variables) = t =

  345(),,) 5;<()) 5;<(,)

  or r =

  34567 (96)(97)

  =

  ),

  2.   Correlation Coefficient = r

  )*+) ,*+,

  1.   Sample  Cov   X, Y =

  Reading 9: Correlation & Regression

•  
• . . . +
• ε
•  

  5. Standard Error of Estimate SEE = S

  R

• ./ 0+T+1

  7. SST = SSE + SSR(or RSS)

  Confidence Interval = ₁ ^{b c 1}

  Test statistic =

  ≠ 0 (linear relationship does exist)

  1

  : b

  1

  H

•  
•  
• ~.? }~ ?
•  
>~./

  = 0 (no linear relationship)

  1

  H : b

  Null and Alternative hypotheses

  8. Hypothesis Testing:

  )

  =

  2

  SSR 0+T+1

  =

  (P*+P)?

  6. Coefficient of Determination (R

  2

  ) = =

  SSU+SSR SSU

  =

  VSS SSU

  where, 0 ≤ R

  2

  ≤ 1 (for single independent variable R

  2

  = r

  = !

•  
•  
Random walk with a drift = x = b + x

  t Reading 13: Currency Exchange Rates

•  
• ε where, b ≠ 0 and b = 1

  t-1 t

  1 By taking first difference y t = x t - x t-1

•  

  1.   Bid-offer Spread = Offer price – Bid price = b + ε

  t

  2.   Fwd  rate   = Spot  Exchange  rate   +

  †4<‡;<ˆ  ‰4y0Š9 Reading 11: Time Series Analysis

   

  1u,uuu

• t t-1
• x = b 7.   Using Dickey-Fuller Test = x

  3.   Forward  premium/discount  (in  %)   = (b -1) x + ε

  1 t-1 t

  = b + b t+ ε 1.   Linear Trend Models = y t

  1 t 9‰4Š  •O3Ž;0••  <;Š•+(m4<‡;<ˆ  ‰4y0Š9/1u,uuu)

  − 1

  9‰4Š  •O3Ž;0••  <;Š•

  Predicted/fitted value of y in period

•   t

  8.   Smoothing Past Values with n-Period

  ˆ ˆ

• (T + 1) = ˆ =

  y b b ( T 1 ) t

  1

1 Moving Average =

• 4.   To convert spot rate into forward qu
• b

  b ^{1 t} x x x x

  y = e

  Spot exchange rate × (1 + % premium) 2.   Log-Linear Trend Models = t t t ..... t n •  

  t − 1 − 2 − ( − 1 )

  Spot exchange rate × (1 - % discount)

•  

  n

  3.   Autoregressive Time-Series Models: 9.   Correcting Seasonality in Time Series

  5.   Covered interest rate parity: First order autoregressive AR (1) = x

•   t Models:

  1

  = b + b x + ε

  1 t-1 t

  1 + i = S 1 + i

•  

  ˆ ∫ ∫ †∫ /‘ ˆ

  pth-order autoregressive AR (p) = x

•  

  For quarterly data = x t = b + b

  1 x t-1

• t
•  

  1’y∫

  F = S = b + b

  1 x t-1 + b 2 x t-2 + …..+ b p x t-p

•   b x + ε ∫ /ˆ ∫

  2 t-4 t 1’y‘ ˆ

• ε

  For monthly data = x = b + b x

• t
•   t

  1 t-1

  Using day count convention:

•  

  b b x + ε

  t-12 ' x

• 2 t

  ! $ Actual

  =

  4.   Mean reverting level of

  t

  10. ARCH model =

  1

• i

  d 1 b

  ) , = − ¹ ₂

₂

  360 "# %&

• ( ˆ ˆ _{t t −1 where is}

  ε = α α ε µ µ + + _{1 t t} ' *

  an error term

  ' ! $ Actual

• 1

  5.   Chain Rule of Forecasting:

  1 S + i f /d f

  Predicting variance of errors in period 360

•  

  ) , )) ,,

  One-period ahead forecast =

  "# %&

•  

  ( F f /d _{2 2}

  (

ˆ ˆ

ˆ ˆ

  t+1 =

  σ = ˆ α α ε + x ˆ b b x ^{tt 1 t} _{t +1} +

• 1

  = _{1 t} Actual

  Two-period ahead forecast=

  ⎛ ⎞

•  

  ⎡ ⎤

  1 i

• Reading 12: Excerpt from ‘Probabilistic

  ⎜ f ⎟

  ˆ ˆ 360 x ˆ b b x

•   ⎢⎣ ⎥⎦
_t = 1 t<
• 2 +1

  ⎜ ⎟

  F = S _{f d f d / /}

Approaches , Scenario Analysis, Decision Tree

  ⎜ ⎟ Actual

  ⎡ ⎤

  1

• i

  6.   Random Walks and Unit Roots: _d

  &amp; Simulations’ ⎜ ⎟ 360

  ⎢⎣ ⎥⎦ ⎝ ⎠

  Random Walk without drift = x = x

•   t t- + εt where, b = 0 and b = 1.

  1

  1

  6.   Uncovered Interest Rate Parity : Correcting Random Walk = y = x - x

•   t t

  e % _/ t-1 i − Δ S = i f d f d

•  

  e % / f d ⎛ S / P ⎞ ⎛ ⎞

  Δ S = i − i P f d d f d d

•  

  

⎜ ⎟ ⎜ ⎟

= 6.   Under the Cobb-Douglas production S / f d

  

⎜ ⎟ ⎜ ⎟

  Forward premium or discount: P P

•  

  function:

  f f

  q = ⎝ ⎠ ⎝ ⎠

  f/d

  For one year horizon =

•  

  Marginal product of capital = MPK =

•  

  α-1 1-α ⎛ ⎞

  CPI F =

  − S d L = α Y/K

  α AK

  f /d f /d ⎜ ⎟ q = S _{/ /} f d f d

  ⎜ ⎟

  α Y/K = r

  CPI •  

  èα = r (K) / Y = Capital

  f " % i

  − i or ⎝ ⎠ f d

  income / Output or GDP

  S ( i ) − i f /d $ ' ≅ S f /d f d

  12.   Fisher effect:

  i 1+ # d &amp;

  ε

  i d = r d + π d

•  

  7. Output per worker or Average labor Using day count convention:

•  

  ε

  i = r + π

  f f f

•  

  productivity (Y/L or y):

• ( " %

  Actual ε ε

  i – r

  f – i d = (r f d ) + (π f - π d )

•  

  GDP/Labor input = TFP × capital-to-

•  

  #$ 360 &amp;' ε ε

  F − S = S (i − i ) _{f /d f /d f /d f d •}   (r f – r d ) = (i f – i d ) - (π f - π d ) labor ratio × share of capital in GDP " Actual %

• 1+ i

  α

• ^d

  Or y = Y/L = Ak

•  

  #$ 360 &amp;' ) , Reading 14: Economic Growth &amp; The Investment Decision

  8.   Contribution of Capital Deepening = Labor 7.   Forward discount or premium as % of spot productivity growth rate – TFP rate:

  1.   Economic growth = Annual % ∆ in real

  F − S f / d f / d

  GDP or in real per capita GDP 9.   Contribution of Improvement in

  ≅ ( i − i ) f d

  S

  technology = Labor productivity growth

  f / d R •

  rate – Capital Deepening If uncovered interest rate parity holds 2.   P = GDP

  “”• R F − S

•  

  f /d f /d e = = %ΔS ≅ (i − i )

  10.   Growth Accounting based on Solow

  f /d f d

  3.   Expressing in terms of logarithmic rates:

  S f /d

  Approach = ∆Y /Y = ∆A / A + α ∆K/K + (1/T) % ∆P = (1/T) % ∆GDP + (1/T)

•  

  (1 – α) ∆L/ L %∆ (E / GDP) + (1/T) % ∆(P / E)

  8.   Purchasing Power parity (PPP) % ∆ in stock MV = % ∆ in GDP + %

•  

  11.   Labor productivity growth accounting P f = S f/d × P d

•  

  ∆ in share of earnings (profit) in GDP equation S = P / P

  f/d f d

•  
• % ∆ in the price-to-earnings

  Growth rate in potential GDP = LT g

•   multiple rate of labor force + LT g rate in labor

  = π – π 9.   Relative version of PPP = %∆S f/d f d productivity

  e e 4.   A two-factor aggregate production

  = π 10.   Ex ante version of PPP = %∆S

• – f/d f e

  function: Y = AF (K, L) 12.   Balanced or Steady State Rate of Growth

  π d in Neoclassical Growth Theory:

  5.   Cobb-Douglas Production Function = F Growth in physical capital stock = ∆K

•   11.   Real Exchange Rate

  α 1 - α

  (K, L) = K L

  14. During the transition to the steady state

  1 α −1 Y

  ' * ! $

  growth path: 13.   In the steady state:

  # &amp; ) ,

  Growth rate of capital per worker = ∆k Growth rates of output per capita = ∆y k

•  
•  
_{new " % new} K

  = ) , š ›

  / k = ∆y / y = ∆A / A + α ∆k / k = / y =

•     −   = Y

  k ! $ 1+  ™ œ •   old ) ,

• –—˜  

  # &amp; š

  è Steady state growth rate of

  1+  ™ ) K ,

• 1+™

    (y/k – Ψ) " %

  (

• _old

  labor productivity

  α

  Capital-to-labor ratio = ∆k / k =

•  

  Growth rate of Total output = ∆Y / Y

•  

  y k ⎡ ⎤

  š › š new new

  = Growth rate of TFP scaled by labor +     −   =   + s =

  1+  ™ œ 1+™ ⎢ ⎥ y k

  force share + Growth rate in the labor

  old old ⎣ ⎦

  (y/k – Ψ)

•  

  š

  force = + n

  1+  ™

  16.   Production function in the endogenous 15.   Proportional impact of the saving rate

  Steady state Output-to-capital ratio =

•  

  growth model = y = f (k ) = ck

  e e e

  change on the capital-to-labor ratio and per

  › 1 š

  = +   + =  

  œ 1+  ™

  Growth rate of output per capita = capita income over time: •  

• Gross investment per worker =
•  

  ∆y /y = ∆k /k = sc – δ – n

  e e e e š

•   +

  1+  ™ Reading 15: Economics of Regulation

  Slope of straight line = [δ + n + θ / (1

•  
• – α)]

  Unrealized g/l (net of tax) is reported as OCI

  Designated at fair value

  Unrealized g/l (net of tax) = FV at end of Yr t – Amort Cost at end of Yr t

  §   Subsequently, at FV at the subsequent reporting date on the B.S.

  §   Reported at FV at the end of Yr t

  Cumulative unrealized g/l is removed from OCI and entire g/l recognized in P&amp;l statement. Where, Realized g/l in I.S = (SP – Recorded FV) + Unrealized g/l

  If debt security is sold: §  

  i income = Market rate at purchase × Initial Fv

  §  

  Subsequently, at FV at the subsequent reporting date on B.S Available

  Reported at FV at the end of Yr t §  

  Realized g/l reported on I.S= SP – Recorded FV §  

  If debt security is sold: §  

  §   Unrealized g/l = FV at the end of Yr t – Amortized Cost at end of Yr t

  i income = Market rate at purchase × Initial FV

  §  

  §   Subsequently, at FV at subsequent reporting date on B.S.

  Reading 16: Interoperate Investments

  Realized g/l reported on I.S= SP – Recorded FV §   Initially, at FV.

  If debt security is sold: §  

  §   Unrealized g/l = FV at the end of Yr t – Amort Cost at end of Yr t

  i income = Market rate × Initial FV

  §  

  N/A Held for trading security

  §   Subsequently, reported at amort cost at the subsequent reporting date on B.S.

  §   Initially, at FV (IFRS) or initial price paid (US GAAP)

  §   If debt security is sold: Realized g/l reported on I.S = SP – CV or Amort cost

    i pmt = (Coupon rate × Par value)   Amort = i pmt – i income

  debt security Ori income = i pmt – Amort

  i income = Market rate at purchase × Initial fair value (FV) of a

  Held-to- maturity §  

  1.   Summary of Accounting Treatment of Investments Income Statement (I.S) Balance Sheet (B.S) Statement ofSH’sEq uity

• for-sale
•  
• Plant &amp; Equipment (% of Ownership Interest × difference b/wBV &amp; FV)

• Land (% of Ownership Interest × difference b/wBV &amp; FV) (xxx) = Residual Amount (Treated as Goodwill) Xxx 3.   Amort. of Excess PP:
•  

  Composition of Investment account: Investor’s proportionate share of Associate’s net equity = [% of Ownership Interest × (beg BV of net assets) + (Reported NI of associate – Profit from upstream sale in Associate’s NI) – Div. paid by the associate)] xxx

  Add: Equity income (as calculated above)* xxx Less: Div. received (% of Ownership Interest × Div paid) (xxx) = Value of Investment in Associate’s company at the end of year xxx

  Balance in the investment in Associate to be reported at the end of year: PP xxx

  (xxx) = Equity Income to be reported as a line item on Investor’s I.S* xxx

  = Investment in Investee xxx Transactions with Associates: 4.   Upstream Transactions: Investor’s share of Associate’s reported NI (% of Ownership Interest × Reported net income) xxx Less: Amort. of excess purchase price (xxx) Less: Unrealized profit (% of Ownership Interest × Profit from upstream sale in Associate’s NI)

•  

  Xxx Add: Unamortized excess PP (Excess PP – Amount attributable to PP&amp;E) xxx

  = Ending net assets Xxx Investor’s proportionate share of Investee’s recorded net assets (% of Ownership Interest × Ending net assets)

  Less: Div. paid (xxx)

  Add: NI Xxx

  Beg net assets Xxx

  Where, *Amount attributable to Plant &amp; Equipment = % of Ownership Interest of investor × (FV of P&amp;E – BV of P&amp;E)

  (xxx) = Balance in investment in Investee Xxx

  Xxx Less: Div. received (% of Ownership Interest × Div. paid) (xxx) Less: Amort. of excess PP attributable to plant &amp; equipment (Amount attributable to PP&amp;E* ÷ Remaining life of PP&amp;E)

  Xxx Add: Investor’s share of Investee’s NI (% of Ownership Interest × Investee’s NI)

  Investment in associate: PP

  (xxx)

  (xxx) = Excess Purchase Price Xxx Less: Attributable to Net Assets:

  Xxx Less: (% of Ownership Interest × BV of Investee’s Net Assets)

  2.   Goodwill = Cost of acquisition – investor’s share of the FV of the net identifiable assets PP

  Add: Unamortized excess PP (Excess PP – Amort. of excess PP) xxx Goodwill under acquisition method = BV for A&amp;L

  5.   Downstream Transactions Investor’s share of Associate’s xxx of Investor + FV for A&amp;L acquired from

  9.   Full Goodwill = Total FV of the Subsidiary – FV of subsidiary’s Acquiree reported NI (% of Ownership Interest identifiable net assets

  × Reported NI) Less: Amort of excess PP (xxx)

  14.   Combined Paid-in Capital (PIC) = (FV of the stock issued to effect the transaction – Less: Unrealized profit (% of (xxx) 10.   Partial Goodwill Method:

  Par value of the stock issued) + Additional Ownership Interest × Profit from the Goodwill = FV of acquisition –

•  

  PIC of investor Acquirer’s share of FV of all downstream sale in Associate’s NI) identifiable tangible and intangible

  = Equity Income to be reported as a xxx assets, liabilities and contingent 15.   Minority Interest = % of subsidiary not line item on Investor’s I.S owned by the Parent × Subsidiary’s Equity liabilities acquired

  Or Unrealized profit = % of goods unsold × Profit

  16.   Value of non-controlling interest under full Goodwill = Purchase price – parent’s on the sale to investee •   goodwill method = Non-controlling

  (acquirer’s) proportionate share of the Investor’s share of the unrealized profit = interest’s proportionate interest in

  FV of subsidiary’s identifiable net Unrealized profit × % of goods unsold subsidiary × FV of subsidiary on assets. acquisition date

  Investor’s share of associate’s xxx 11.   Under Acquisition method, the allocation reported NI (% of Ownership Interest of PP: 17.   Value of non-controlling interest under

  × Reported NI) partial goodwill method = Non-controlling

  FV of the stock issued xxx Less: Amort of excess PP (xxx) interest’s proportionate interest in

  Add: BV of Investee’s net assets xxx Add: Realized profit (% of goods xxx subsidiary × FVof the subsidiary’s

  = Excess PP xxx unsold × Unrealized profit) identifiable net assets on acquisition date

  = Equity Income to be reported as a xxx line item on Investor’s I.S FV of the stock issued xxx Goodwill Impairment:

  Less: FV allocated to identifiable net (xxx)

  18. Goodwill Impairment Test under IFRS: Business Combinations assets

  Impaired when CA of the Cash-generating

•   = Goodwill xxx

  6.   Merger = Company X + Company Y Unit &gt; RA of the Cash-generating Unit

  = Company X 12.   Allocation of excess PP: Excess PPP =

  Impairment loss = CA of Cash-generating

•   7.   Acquisition = Company X + Company Y = Sum of diff b/w FV and BV of identifiable

  Unit - RA of Cash-generating Unit where, (Company X + Company Y) assets + Goodwill

  RA = Higher of Net SP and its VIU Net SP = FV – costs to sell

  8.   Consolidation = Company X + Company 13.   Combined Assets &amp; Liabilities (A&amp;L)

  VIU = PV of expected future CF of Y = Company Z reported on Consolidated B.S under

  19. Goodwill Impairment Test under U.S.

  5.   Net i income = Discount rate × Net 10.   Adjusted Pre-tax Income: GAAP (Two Step Approach) Pension asset

  = Reported Pre-tax income + (Actual

•   return on plan assets – Expected return

  Step 1: Goodwill Impairment Test 6.   Net return on plan assets = Actual return on plan assets)

•  

  on plan assets – (Plan assets × i rate) Or Impaired when CV of Reporting Unit

•  

  (including Goodwill) &gt; FV of = Reported Pre-tax income + Total

•   Reporting Unit (including Goodwill). 7.   Actuarial g/l = Actual return – (Plan assets reported pension and other post-

  × Expected return) Step 2: Measurement of Impairment retirement benefits - Current service

•  

  costs - i exp component of pension loss = CV of Reporting unit’s cost + Actual return on plan assets

  Goodwill - Implied FV of Reporting 8.   Total Periodic Pension Costs =Sum of unit’s Goodwill components of periodic pension costs

  Where Implied FV of Reporting unit’s 11.   Adjusted Net Operating Exp=Reported Net

•  

  operating exp – Total reported pension and Goodwill = FV of Reporting Unit –

  Total periodic pension cost in a given

•  

  other post-retirement benefits + Current FV of Reporting unit’s net assets period = ∆in Net pension liability or service costs asset adjusted for employer

  Reading 17: Employee Compensation: Post

  contributions 12.   Adjusted i Exp. = Reported i exp. + i exp.

  Employment &amp; Share-Based

  Total Net periodic pension cost (End component of pension cost

•  

  Funded Status* – Beg Funded Status*) 1.   Under DC Plans: Pension exp = Co.’s

• – Employer Contribution 13.   Adjusted i and investment Income annual contribution to plans adjusted for ∆ where *Pension liability is treated as a =Reported i and investment income + in yr-end accruals negative Actual return on plan assets

  2.   Funded Status = PV of DB obligations – 14.   Compensation exp. = FV of stock on the

  9.   Adjusted Total P&amp;L pension exp (income) FV of plan assets

  Grant Date = Current service costs + i costs + (-)

•   3.   Period pension cost of a Co.’s DB pension 16.

  actuarial losses (actuarial gains) + past Compensation  exp  recognized   = plan = ∆ in Net pension liability or asset

  ¤0&lt;•34•0y¥•ˆ  040+

  service costs (or plan amendments) – adjusted for employer’s contributions

  5•9Š•ˆ  34¦‰•09;Šy40  •O‰

    (+) Actual return (loss) on plan assets

  V•¦;y0y0•  5•9Šy0•  ‰•&lt;y4ˆ

  Or 4.   Net i exp = Discount rate × Net Pension

  = Reported Total P&amp;L pension exp

•   liability

  (income) + Expected return on plan where Discount Rate = rate used to assets – Actual return on plan assets calculate PV of future pension benefits

  Included as g/l in NI

  Current rate Historical rate LIABILITIES Monetary liabilities: a/c payable, LT debt, accrued exp., and deferred income taxes.

  Net monetary assets or Net monetary liabilities Treatment of translation adj. in parent’s consolidated F.Ss Accumulated as a separate component of equity

  NI Average rate Mixed (a mix of average rate &amp; historical rate) Exposure Net Assets or Net Liabilities

  Average rate Average rate Average rate Historical rate

  Revenues Average rate Average rate EXPENSES Most Expenses Expenses related to assets translated at historical X rate e.g. COGS, Dep., &amp; Amort. etc.

  Historical rates Beg R.E + translated NI – div. translated at historical rate

  Historical rates Beg R.E + translated NI – div. translated at historical rate

  Historical rate EQUITY Other than R.E i.e. Common Stock Retained Earnings (R.E)

  Current rate Current rate Current rate Current rate

  Nonmonetary liabilities: i) measured at current value ii) not measured at current value i.e. deferred revenue Current rate

  Foreign Subsidiary’s Functional Currency FC Parent’s Presentation Currency inventories measured at market value under the lower of cost or market rule. ii) Measured at historical costs e.g. PP&amp;E

• ve translation adj When liabilities translated at current X rate &gt; assets translated at current X rate Net Liability B.S exposure
• ve translation adj

  Current rate Current rate Current rate Current rate

  X rate at which F.Ss are translated from foreign subsidiary’s bookkeeping currency to parent’s presentation currency. ASSETS Monetary assets: Cash, a/c receivables Nonmonetary Assets: i) Measured at current value i.e. marketable securities &amp;

  Foreign Subsidiary’s Functional Currency FC Parent’s Presentation Currency Translation Method: Current Rate method Temporal Method

  Statements (F.Ss) Into Parent’s Presentation Currency Under IFRS &amp; U.S. GAAP

  (X = exchange) 3.   Re-measurement Gain = NI − NI before re-measurement gain 4.   Re-measurement Loss = NI − NI before Re-measurement loss 5.   Rules For Translation Of A Foreign Subsidiary’s FC Financial

  Foreign Currency (FC) B.S Exposure Strengthens Weakens When assets translated at current X rate &gt; liabilities translated at current X rate Net Asset B.S exposure

  2.   Balance Sheet Exposure:

  1.   Cumulative Translation Adjustment = CTA = Assets – Liabilities – Common Stock – Retained Earnings

  Reading 18: Multinational Operations

• ve translation adj
• ve translation Adj
TEMPORAL METHOD: CURRENT ©ª&lt;&lt;•0Š  P&lt;«9  ‰&lt;y3•  y0ˆ•O

  7.   Restatement Factor =

  RATE ¬y9Š4&lt;y3;-    ‰&lt;y3•  y0ˆ•O

  METHOD Net Monetary Net Monetary Liability Exposure Asset Exposure

  8.   Restated Capital Stock = Capital stock original value ×

  FC Rev Rev Rev §   ↑ §   ↑ §   ↑ âê&lt;&lt;•0Š  P&lt;ô9  ‰&lt;y3•  y0ˆ•O  4&lt;  ˆ;Š•  4m  340Š&lt;yđêŠy40,‡Žy3Ž•5•&lt;  y9  -;Š•&lt; strengthens Assets Assets Assets

  §   ↑ §   ↑ §   ↑ relative to Liabilities Liabilities Liabilities ¬y9Š4&lt;y3;-  ‰&lt;y3•  y0ˆ•O §   ↑ §   ↑ §   ↑ parent’s presentation

  NI ↓ NI ↑ NI ↑ §   §   §   ©ª&lt;&lt;•0Š  P&lt;«9  ‰&lt;y3•  y0ˆ•O currency SH’ equity SH’ equity SH’ equity

  §   ↓ §   ↑ §  

  9.   Restated Revenue = Revenue original value ×

  ¯5•.‰&lt;y3•  y0ˆ•O Translation Translation §   §   ↑ loss gain §   +ve Translation

  10.   Loss from holding beg balance in cash = -Beg balance in cash × adj.

  ©ª&lt;&lt;•0Š  P&lt;«9  ‰&lt;y3•  y0ˆ•O  –¬y9Š4&lt;y3;-  ‰&lt;y3•  y0ˆ•O FC weakens Rev Rev Rev §   ↓ §   ↓ §   ↓ relative to Assets Assets Assets ¬y9Š4&lt;y3;-  ‰&lt;y3•  y0ˆ•O §   ↓ §   ↓ §   ↓ parent’s Liabilities Liabilities Liabilities

  §   ↓ §   ↓ §   ↓ presentation

  11.   Loss from increase in cash during the yr = -Increase in cash ×

  currency NI NI Net Income §   ↑ §   ↓   §   ©ª&lt;&lt;•0Š  P&lt;«9  ‰&lt;y3•  y0ˆ•O+¯5•  ‰&lt;y3•  y0ˆ•O

  SH’ equity ↑ SH’ equity ↓ ↓ §   §   Translation Translation SH’ equity §   §   §   ↓ ¯5•  ‰&lt;y3•  y0ˆ•O gain loss -ve §  

  Translation adj.

  12.   Gain from holding note payable = Notes payable ×

  ©ª&lt;&lt;•0Š  P&lt;«9  ‰&lt;y3•  y0ˆ•O+¬y9Š4&lt;y3;-  ‰&lt;y3•  y0ˆ•O ¬y9Š4&lt;y3;-  ‰&lt;y3•  y0ˆ•O

  6. Impact of Changing Exchange Rates on Exposure

  U;O  RO‰ Foreign Currency

  13.   Avg. effective tax rate =

   •&lt;•Š;O  ¯334ª0Šy0•  •&lt;4myŠ9 Strengthens Weakens CURRENT RATE METHOD:

  Net Assets Gain Loss

  14.   Organic sales growth = Net sales growth + Foreign X impact +

  Net Liabilities Loss Gain Acquisition/Divestiture impact. TEMPORAL METHOD: Net Monetary Assets Gain Loss Net Monetary Liabilities Loss Gain

  Hyperinflationary Economy

  ²•Š  ³©  

  V.R  

  (Cash + ST invstmnt. )} – {Total liab

  Reading 19: Evaluating Quality of Financial t t

• 11.   Z-score = 1.2  ×   1.4  ×  

  U¯ U¯

• – (Total LT debt + Debt in current

  Reports t t R¶·U   º.»  4m  R¼ªyŠP

  3.3  ×   0.6  ×   + + liab.)}]

  U¯ ¶.»  4m  -y;®y-yŠy•9 S;-•9  

•  

  B. S  based  Accruals  Ratio = 1.   DSR (days sales receivable index) = 1.0  ×  

  U.¯ ²Ò¯~+²Ò¯~k/

  (Receivables /Sales ) / (Receivables

  t t t– ²Ò¯~’²Ò¯~k/ &gt;

  /Sales )

  1 t–1

Reading 20: Integration of Financial Statement

Analysis

  3.   CF based aggregate accruals: 2.   GMI (gross margin index) = Gross

• Aggregate Accruals = NI t – (CFO t
•   margin / Gross margin

  t–1 t

  1.   DuPont Analysis: CFI )

  t

  ROE = Tax Burden × Interest

•  

  CF  based  Accruals  Ratio =

•  
• 3.   AQI (asset quality index) = [1 – (PP&amp;E t

  Burden × EBIT margin × TATO ×

  ²·Í+(©†ÒÍ’©†·Í)

  CA )/TA ] / [1 – (PP&amp;E + CA )/TA ]

  t t t–1 t-1 t-1 (²Ò¯Í’²Ò¯Ík/)

  Financial Leverage

  &gt;

  ROE = NI/EBT × EBT/EBIT ×

•   Op. CF before interest and taxes = Op.
•   SGI (sales growth index) = Sales /Sales

  4. t t–1

    EBIT/Sales × Sales/Assets ×

  CF + cash i paid + cash taxes paid Assets/Equity

  Op income adjusted for accounting ∆

•   5.   DEPI (depreciation index) = Dep rate t–

  ROE = Net profit margin × asset = Profit before i&amp; taxes + amort. of

•   /Dep rate

  1 t

  turnover × leverage goodwill where, Dep rate = Dep/(Dep + PP&amp;E) Adjusted Asset base = Adjusted Total

•  

  Ò‰.©†

  Assets = Total Assets of the company 4.   Cash  Return  on  Assets =

  6.   SGAI (sales, general, and admin exp

  ¯5•  U.¯

• – Investments in Associates index) = (SGA /Sales ) / (SGA /Sales )

  t t t–1 t–1

  Adjusted NI = NI of Co – NI from

•  

  5.   Cash Flow to Reinvestment = Associates

  Ò‰.©†

  7.   Accruals = (Income before extraordinary

  3;‰yŠ;-  •O‰•0ˆyŠª&lt;•9

•   Adjusted  Tax  Burden = items – Cash from operations)/TA

  ²·+R¼ªyŠP  y034¦•   R¶U

  6.   Cash Flow to Total Debt = /

  8.   LEVI (leverage index) = Leverage t

•   Adjusted  TATO =

  Ị‰.©†  ®•m4&lt;•  y0Š•&lt;•9Š  &amp;  ỠƯו ÂÃÄ

  Leverage t–1 where, Leverage = Debt /

  U.” ẫấậ  đẻkẫấậ  ÉÊ.ẹ-ẩỉễị-ễ.ỹÉ-‘  đẻkÉ-‘  ÉÊ.ẹ-ẩỉễị-ễ

  Assets

  &gt;

  7.   Capacity to pay debt (in years) = α + (β × Earnings ) + ε

  U.”

  9.   Earnings t+1

  1 t

  Accruals and Earnings Quality =

  Ò‰.©†+©;‰yŠ;-  RO‰•0ˆyŠª&lt;•9

  2.   B.S based aggregate accruals 10.   Account receivable turnover = (365/DSO)

  Aggregate Accruals = NOA – NOA

•   t t t-1

  Ị‰.©†  ®•m4&lt;•  Z&amp;  ỠƯו

  8.   CF Interest Coverage = where, NOA = Net operating Assets

  t t Z  •;yˆ  

  = Op Assets – Op Liab = [{TA –

  t t t

• β

  ∆ in MV = AT CF from investment + (End MV – Beg MV) OR = AT CF from invstmnt. – (Beg MV – End MV)= AT CF from invstmnt. – Eco. Dep

• ;&lt;•0Š  ©4.’9  ¦TŠ  ©;‰ ²·  4m    •;&lt;•0Š  ©4.
• NWCInv – T (Sal
• – B

  T

  8.   (1 + Nominal rate) = (1 + Real rate) (1 + Inf rate)

  9.   Profitability index = PI = 1 + (NPV/Initial investment) when PI &gt; 1, invest and when PI &lt; 1, do not invest.

  10.   CAPM = r i = R

  F

  i

  [E (R

  M

  ) – R

  F

  ] Economic and Accounting Income 11.   Accounting income = Rev – Exp 12.   Economic Income = AT CF from investment +

  13.   Economic Profit (EP) = NOPAT– $WACC where, NOPAT = net operating profit after tax i.e. EBIT (1 – Tax rate) EBIT = earnings before interest and taxes $WACC= dollar cost of capital = WACC × capital Capital (after Year 1) = investment = Initial Investment – depreciation

• T (Sal – B )
•  •;&lt;•0Š  ©4.•/R ¶•03Ž¦;&lt;T«9  •/R

  CF = (∆S – ∆C) (1 – T) + T∆D 7.   Terminal year after-tax non-operating cash flow = TNOCF = ∆Sal

  14.   MVA  or  NPV =

  R•Í (1’³¯©©)Í á Š\1

  15.   Total value of Co. = original investment + NPV

  16.   Residual income (RI) = NI – Equity Charge

  RI

  t

  = NI

  t

  e

  × B

  t-1

  6.   Annual after-tax operating cash flow (incremental)

  CF = (∆S – ∆C – ∆D) (1 – T) + ∆D or

  ) Replacement Project 5.   Initial Outlay = FCInv + NWCInv – Sal

  Decomposition and Analysis of the Co’s Valuation: 9.   Parent Co. pro-rata share of subsidiary/affiliates = (Subsidiary’s share price in FC× Shares held by Parent Co. × X- rate)/Parent Co. total market capitalization

  10.   Implied Value of Parent Co. (excl. subsidiary/affiliates) = Parent Co.’s Mkt Cap - Value of subsidiary/affiliate holdings

  11.   P/E ratio of Parent Co =

  12.   Implied P/E ratio of Parent Co. = Implied  Value  of  Parent  Co.